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True / False Questions
1.A transaction is an exchange or event that directly affects the assets, liabilities, or stockholders' equity of a company.
TRUE
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 2
2.A transaction can cause only one account on the balance sheet to change.
FALSE
At least two accounts on the balance sheet must change so that assets continue to equal liabilities and stockholders' equity.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 2
3.If a company uses $100 million in cash to pay off debt, its stockholders' equity will rise $100 million.
FALSE
Assets and liabilities would each decrease by $100 million; stockholders' equity would not change.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 2
4.General Motors (GM) signs a new labor agreement that its workers will receive a 5% wage increase next year. This is considered a transaction that affects GM's financial statements in the current year.
FALSE
A promise to pay has been exchanged for a promise to work next year. There has not yet been a transaction; this event does not affect GM's financial statements in the current year.
AACSB: analytic
AICPA BB: critical thinking
AICPA FN: reporting
Difficulty: Hard
Learning Objective: 5
5.All of a company's business activities have a direct economic effect on the company.
FALSE
Some activities, such as signing an employment contract, only have an indirect economic effect.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 5
6.If total assets increase, then either liabilities or stockholders' equity also must increase.
TRUE
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 2
7.Company X issues $40 million in new stock for cash. This does not affect stockholders' equity because as new shares are sold the value of existing shares falls.
FALSE
When new stock is issued for cash, the company has more cash and contributed capital. Assets and stockholders' equity both rise.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 2
8.The separate entity concept requires that business transactions be examined from the point of view of the company, not the company's owners.
TRUE
AACSB: analytic
AICPA BB: legal
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 2
9.You are pleasantly surprised to discover that a popular actress appears on The Tonight Show wearing your company's jeans. Later, your company's sales increase by $500,000 as a result. When the actress appeared on TV, you would have recorded an asset because the TV appearance was expected to bring future economic benefits to your company.
FALSE
No asset would be recorded; the future economic benefits (or resources) were not assured on the date of the TV appearance. Further, no transaction occurred with the appearance. Your company's assets, liabilities, and stockholders' equity will not change until the jeans are produced and sold.
AACSB: reflective thinking
AICPA BB: critical thinking
AICPA FN: reporting
Difficulty: Hard
Learning Objective: 3
10.If the total dollar value of credits to an account exceed the total dollar value of debits to that account, the ending balance of the account will be a debit balance.
FALSE
If credits exceed debits, the account will have a credit balance.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 3
Multiple Choice Questions
11. How many of the following statements regarding the balance sheet are true?
· A "classified" balance sheet is one that contains privileged information.
· All liabilities require that the company sacrifice resources at some time in the future.
· All companies use an identical list of account names defined by the Financial Accounting Standards Board (FASB).
a. None
B. One
c. Two
d. Three
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
12. How many of the following statements regarding debits and credits are true?
· A decrease in assets will result in a credit to an asset account.
· Across all accounts, the total value of all debits must equal the total value of all credits.
· The total value of all debits to a particular account must equal the total value of all credits to that account.
a. None
b. One
C. Two
d. Three
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 3
13. How many of the following statements regarding the balance sheet are true?
· Any item on a balance sheet labeled payable is a liability of that company.
· Current Assets are listed on the balance sheet in order of how fast they are used up or can be turned into cash.
· The basic accounting equation must always balance.
a. None
b. One
c. Two
D. Three
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 2
14. How many of the following statements regarding posting and classification are true?
· Posting journal entries involves copying the dollar amounts from the journal into the ledger.
· If a $100 debit is erroneously posted to an account as a $100 credit, the accounts will be out of balance by $100.
· If a $5,000 liability is misclassified as stockholders' equity then the accounting equation will still balance.
a. None
b. One
C. Two
d. Three
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 3
Learning Objective: 4
15. How many of the following statements regarding the concepts underlying the balance sheet are true?
· A company buys land for $5 million dollars in 1983. The land is now worth $15 million. The company should increase the book value of this asset on its balance sheet to reflect its current value.
· All events affecting the current value of a company are reported on the balance sheet.
· According to the cost principle, assets are valued at their replacement cost.
A. None
b. One
c. Two
d. Three
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 5
16.Which of the following would be listed as a long-term asset?
a.Cash.
b.Supplies.
C.Buildings and equipment.
d.Total assets.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 1
17.Which of the following would be listed as a current liability?
a.Cash in the bank.
b.Notes payable due in two years.
c.Supplies.
D.Accounts payable.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 1
18.A long-term liability is one that the company:
a.has owed for over one year.
b.has owed for over five years.
C.will not pay off for over one year.
d.will not pay off for over five years.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 1
19.A current asset is one that:
a.the company has owned for over one year.
b.the company has owned for over five years.
C.the company will use up or convert into cash in less than one year.
d.the company will use up or convert into cash in less than five years.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 1
20.At the start of the first year of operations, retained earnings on the balance sheet would be:
A.equal to zero.
b.equal to contributed capital.
c.equal to stockholders' equity.
d.equal to the negative of liabilities.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
21.Account names in the chart of accounts should be:
a.sufficiently descriptive to enable users to quickly understand items.
b.consistent throughout the financial statements and records.
c.linked to account numbers.
D.all of these.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
22.Which line items on the balance sheet would be classified as long term?
a.Cash; Supplies; Accounts Payable.
B.Property, Plant and Equipment; Notes Payable; Other Assets.
c.Supplies; Property, Plant and Equipment; Notes Payable.
d.Total Assets; Total Liabilities; Other Assets.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
23.How much financing did the stockholders of Purrfect Pets, Inc., directly contribute to the company?
a.$117,900.
B.$662,100.
c.$780,000.
d.$1,398,100.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
24.Which of the following is not an example of a liability?
A.Interest receivable.
b.Wages payable.
c.Accounts payable.
d.All of these are examples of liabilities.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
25.The local branch of the Universal Bank System (UBS) receives money from depositors and lends it to borrowers. Which of the following would be true about UBS's financial statements?
a.UBS reports deposits as assets and loans as liabilities.
b.UBS reports both deposits and loans as assets.
C.UBS reports deposits as liabilities and loans as assets.
d.UBS reports both deposits and loans as liabilities.
AACSB: reflective thinking
AICPA BB: critical thinking
AICPA FN: reporting
Difficulty: Hard
Learning Objective: 1
26.Which of the following is not an example of an asset?
a.Notes receivable.
b.Supplies.
c.Prepaid expenses.
D.Retained Earnings.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
27.If a company borrows money from a bank and signs an agreement to repay the loan several years from now, in which account would the company report the amount borrowed?
a.Contributed Capital.
b.Accounts Payable.
C.Notes Payable.
d.Bonds Payable.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
28.The Sweet Smell of Success Fragrance Company borrowed $60,000 from the bank and used all of the money to re-design its new store. Sweet Smell's balance sheet would show this as:
A.$60,000 under Furnishings & Equipment and $60,000 under Notes Payable.
b.$60,000 under Supplies and $60,000 under Accounts Payable.
c.$60,000 under Prepaid Expenses and $60,000 under Accrued Liabilities.
d.$60,000 under Other Assets and $60,000 under Other Liabilities.
AACSB: analytic
AICPA BB: resource management
AICPA FN: measurement
Difficulty: Medium
Learning Objective: 1
29.The Buddy Burger Corporation owes $1.5 million to the Texas Wholesale Meat Company from whom Buddy Burger buys its burger meat. Which account would Buddy Burger use to report the amount owed?
a.Cash.
B.Accounts Payable.
c.Supplies.
d.Accounts Receivable.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 1
30.Which of the following describes the classification and normal balance of the retained earnings account?
a.Asset, debit
B.Stockholders' equity, credit
c.Liability, credit
d.Stockholders' equity, debit
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Learning Objective: 1
31.If a company receives $20,000 cash on accounts receivable and uses the cash to pay $20,000 on accounts payable then:
a.assets would increase by $20,000 while liabilities would decrease by $20,000.
b.liabilities would decrease by $20,000 while stockholders' equity would increase by $20,000.
C.assets would decrease by $20,000 while liabilities would decrease by $20,000.
d.liabilities would decrease by $20,000 while stockholders' equity would decrease by $20,000.
AACSB: analytic
AICPA BB: resource management
AICPA FN: measurement
Difficulty: Medium
Learning Objective: 2
32.In 1999, the Denim Company bought land that cost $15,000. In 2005, a similar piece of land was bought for $28,000 and the company's existing land was estimated to be worth $18,000. On the balance sheet at the end of 2005, the land that was purchased in 1999 would be reported at:
A.$15,000.
b.$28,000.
c.$18,000.
d.the average of the three prices.
AACSB: analytic
AICPA BB: legal
AICPA FN: measurement
Difficulty: Medium
Learning Objective: 2
33.What is the minimum number of accounts that must be involved in any transaction?
a.One.
B.Two.
c.Three.
d.No minimum.
AACSB: analytic
AICPA BB: resource management
AICPA FN: measurement
Difficulty: Easy
Learning Objective: 2
34.Transactions include which three types of events?
a.Direct events, indirect events, and other events.
b.Monetary events, production events, and other events.
C.Observable external events, observable internal events, and unobservable events.
d.Current events, past events, and future events.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Easy
Learning Objective: 2
35.A company disposes of $1 million of its assets. Which of the following could not be true?
A.Assets remain the same, and liabilities and stockholders' equity both decrease by $1 million.
b.Assets decrease by $1 million, liabilities decrease by $1 million, and stockholders' equity is unchanged.
c.Assets, liabilities, and stockholders' equity all remain the same.
d.Assets decrease by $1 million, and liabilities and stockholders' equity both decrease by $500,000.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Hard
Learning Objective: 2
36.Your company orders and broadcasts a 30 second ad during the Super Bowl for $1.2 million. It is legally obligated to pay for the ad but has not yet done so.
a.This is an internal unobservable event so it does NOT affect the balance sheet.
b.This is an external unobservable event so it does NOT affect the balance sheet.
c.This is an internal observable event that affects the balance sheet.
D.This is an external observable event that affects the balance sheet.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 2
37.In part, a transaction affects the accounting equation as follows:
Which of the following must be true for this transaction?
a.If other assets are unchanged, stockholders' equity must be increasing.
B.If other assets are unchanged, stockholders' equity must be decreasing.
c.If stockholders' equity is unchanged, another asset must be decreasing.
d.If stockholders' equity is unchanged, other assets must be unchanged.
AACSB: analytic
AICPA BB: resource management
AICPA FN: reporting
Difficulty: Medium
Learning Objective: 2